In Depth

What's Holding India Back

October 09, 2009

Spitting a fine stream of red betel-leaf juice into the knee-deep waters of his rice paddies, Subhash Mahapatra points to the line dividing his land from his neighbor's. It's not much, but his family has cultivated rice on the two acres of dark, loamy soil for generations, and Mahapatra knows of no other way to feed his children. "If I don't want to sell it, do I not have the right to say no?" he asks.

The answer to that question may determine whether India will see a new industrial revolution, one broad enough to provide the jobs needed to lift millions out of poverty. Mahapatra's property is part of a 4,000-acre parcel that the government of Orissa state five years ago promised to steelmaker Posco (PKX). The South Korean giant had hoped it would be home to India's biggest steel mill, a $12 billion behemoth with its own port on the Bay of Bengal. So far, Posco hasn't even managed to build a fence around the site, as Mahapatra and thousands of others have battled police, once even taking Posco workers hostage for a few hours.

Across India, similar struggles are holding back nearly 200 proposed factories, railroads, highways, and other projects. Add it up and you'll find that some $98 billion in investment is in limbo, the Association of Indian Chambers of Commerce estimates. On Oct. 5, Luxembourg-based ArcelorMittal (MT) said problems getting land may force it to reconsider a $20 billion plan to build two steel mills near the Posco site. Automaker Nissan-Renault, London-listed metals giant Vedanta Resources, and Indian outsourcing stars Infosys and Wipro have all seen initiatives scuttled or delayed by troubles in acquiring land. "All I want to do is build a steel plant," says Gee Won Sung, Posco's India director. "If we can, a whole city will be created," says Sung, his voice barely registering in the air-conditioned conference room on the sixth floor of the company's glass-fronted office building in Orissa's capital, Bhubaneswar. "In 10 years, this whole region would change."

That requires convincing Mahapatra and his neighbors to move. Under Indian law, the answer to Mahapatra's question is clear: He doesn't have the right to say no once the state has decided to acquire his land. But under Indian reality, there's not much Posco or the government can do if Mahapatra stays put. Politicians hate the idea of evicting voters, and riots have broken out when surveyors show up with measuring gear. In Mahapatra's village, locals stand guard at a gate they erected, ready to fight any effort to move them out.

ADVANTAGE CHINAA proposed expansion of Mumbai's airport has been slowed because the runways abut a slum that residents refuse to vacate. Tata Motors (TTM) halted construction on a factory for its $2,500 Nano subcompact in West Bengal state after locals blockaded the site for months. The company finally decided to build the plant 1,300 miles away, in Gujarat. On the beaches of Goa, fishermen heckle Environment Minister Jairam Ramesh when he defends moving them from the coast to make way for resorts that charge foreigners $400 a day to sunbathe on fenced-off stretches of sand.

If these problems can't be resolved, India will be hard-pressed to create the kind of sustainable economic growth enjoyed by its giant neighbor, China. Some 280 million Chinese work in factories; fewer than 45 million Indians do so, and India's industrial output is about the same as Spain's. "People who've gotten a little too excited about the India story seem to have forgotten that without solving a basic issue like land, it's difficult to see the country having any sort of industrial revolution," says Robert Prior-Wandesforde, senior Asia economist at bank HSBC.

With its anemic manufacturing base, India's economy offers scant opportunities for the rural poor. Cities such as Bangalore and Mumbai have been transformed by tech services, but fewer than 10 million people work in that sector. India's largest employer is its fields, where some 550 million farmers such as Mahapatra toil in conditions little changed for centuries. "There's nothing here," Mahapatra says as his daughter-in-law prepares a meal of rice, lentils, and vegetables in the two-room hut shared by his extended family of nine people. "Jobs? Development? I was born a farmer, and I will die one."

Finding new homes for farmers lies at the heart of the dispute. Under Orissa law, the displaced are given small plots elsewhere—but never more than five acres, regardless of the amount of land acquired by the government. Other provisions include employment for one member of the family, up to $500 in cash for job training, and help building a new house. "We understand a sacrifice is being made," says P.K. Pattanayak, who is overseeing development of a $4.5 billion mill that Tata Steel wants to build in eastern Orissa. "Unless villagers are convinced that we are sincere in our efforts to care for them, I don't think any industry can move forward."

Indian farmers have reason to be wary. While governments offer what they call the going rate for property, in much of rural India—where most people are subsistence farmers—there are so few transactions that establishing a market value for land is virtually impossible. From 2001 to 2007, 1.4 million residents of Orissa and three neighboring states were displaced after their land was acquired by the government or companies, the Rural Development Ministry says. Most of them ended up unemployed, and 90% say they received too little compensation, according to a report by Delhi's Indian Social Institute and London-based ActionAid.

The disputes can last years. In 1991, Orissa started to assemble land for the industrial zone where Tata Steel would eventually seek to build its mill. At the time, the state offered Chakradhar Haibru $1,400 for his two acres, though he was allowed to stay on until an industrial tenant was found. The 70-year-old farmer, frail and illiterate, thought the price was laughable and never cashed the check. Today he leads his neighbors in opposing Tata. "My family has lived here since 1860," Haibru says in the dusty courtyard of his home, a stone's throw from a monument to 12 protesters killed by police during a 2006 riot over land. "And because Tata wants to build a plant here, I must move. Where do I go?"

To see where he might go, drive the 10 miles to one of Tata's resettlement colonies. Each of the 700 families that agreed to move out got a tenth of an acre, about $3,000 to build a house, and either training for a job or a one-time payment of $4,500. Some 80 brick-and-mortar houses line dusty streets where children play catch and unemployed men linger in the doorways. "I miss the village life, my old home," says Lakshmi Mohanto, whose family sold six acres to the state for Tata to use. "But this is a nice house."

She's among the lucky ones. Eager to convince Haibru and others to make way for the Tata mill, the company has been relatively generous to those who have moved. Less fortunate are the 196 people who have lived in a Posco transit camp since agreeing to sell their land to the Koreans. Though they haven't yet gotten paid for their property—in fact, no price has been set—they say they have been threatened by neighbors for supporting Posco. But until Posco breaks ground on the mill, the company says, it has no plans to build permanent homes. Santosh Mohanty, 26, has shared a one-room shack with his parents and a brother for more than a year. With no work, the family scrapes by on a Posco handout of $1.60 a day. Asked if he is happy with his decision to sell, tears well up in Mohanty's eyes. "No," he says.

Mohanty's plight highlights the other roadblock to resettlement: finding jobs for those who have always lived off the land. Tata Motors' Nano factory in West Bengal, for instance, would have required some 8,000 people to move, but it would have created fewer than 1,000 jobs, most requiring skills few farmers have. So an Indian industrial revolution could end up displacing many more people than it employs.

LAND TITLES IN QUESTIONFarmers feel they could get a better price by dealing directly with companies rather than with government development agencies, whose offers are nonnegotiable. That may happen more often if a bill being considered in Delhi makes it through Parliament. Under the measure, companies would be required to reach agreement with individuals for 70% of the land for any project, setting a fair value for the property. Then the government would step in to force any holdouts off the remaining 30%, paying the established price rather than the low rates many owners are offered today. But land title in India is difficult to trace, and it's unclear whether those who work the land but don't own it—often 80% of the displaced—will get anything.

A few companies are willing to put in the hard work—and hard cash—needed to cut deals with individuals. Not far from Tata Motors' proposed plant in West Bengal, JSW-Bengal Steel acquired 4,860 acres in 2008. The company paid farmers $6,400 per acre—three times what the government said the land was worth—and threw in another $6,400 in company shares, which the farmers can sell when the mill is completed in 2011 or 2012. "We started with a simple realization: For a farmer, his connection to land is like an umbilical cord," says Biswadip Gupta, chief of JSW-Bengal Steel. "Unless you can get landowners on your side, there's no point in even trying [to build a factory]." In 2007, when the government of Haryana state, outside Delhi, offered little help to Reliance Industries in acquiring land for a special economic zone, the company ended up paying $46,000 per acre. "You'll see their lives totally change," says Vivek Tripathi, at the time a sales manager with ICICI Bank who was on hand to help the newly rich farmers set up bank accounts. "They're buying SUVs like biscuits."

Sometimes villagers are savvy enough to band together to get a better deal. More than 120 families living near the city of Pune pooled their 400 acres and created Magarpatta Township & Construction. That company now leases land to developers, who have turned it into an IT park, schools, and hospitals. The value today is $252,000 an acre, or 10 times what it was when the company was formed a decade ago.

The Pune group and those that Reliance dealt with, though, are relatively sophisticated farmers on the fringes of India's largest cities. Vedanta Resources, a $6.6 billion aluminum, zinc, and copper producer, has spent five years staring down an indigenous people who inhabit a remote section of Orissa called the Niyamgiri hills. The 8,000 Dongria Kondh still hunt with bows and arrows and worship one of the hills, calling it Niyam Raja, or God of Justice. The Dongria's face-off with Vedanta caught the eye of activists in Britain, who have mounted a vigorous publicity campaign against the company. Bianca Jagger has led protests at Vedanta shareholder meetings in London, while others have lobbied the Church of England to sell its $4 million investment in the company. Troubled by Vedanta's actions, Norway's government investment fund sold its $15 million stake in 2007.

"THERE WAS NOTHING HERE"The protests, though, only delayed Vedanta in Orissa. Below the Niyamgiri, the company in August finished the first section of a $9 billion plant, which when completed will be the world's biggest aluminum refinery. Touring the facility, Chief Operating Officer Mukesh Kumar can barely contain his pride. "There was nothing here, absolutely nothing," he says. "And in record time we have built this amazing plant."

But Vedanta today isn't making its aluminum using bauxite mined from the Dongria's sacred hills, and instead trucks it in from the other side of India. Before the plant can reach its full potential, the company must get permission from India's environmental watchdog to start mining at the site. After fending off opponents who say the mine will decimate the landscape, the company is likely to get final clearance from Delhi by yearend—though the Indian Supreme Court has ordered Vedanta to hand over 5% of the facility's pretax profits to an environmental group. Today, a half-finished conveyor belt snakes up the slopes from the plant, ready to start feeding on the hilltop's 78 million tons of bauxite.

While the dispute highlights the difficulties of getting land, it also reveals the complexity of the debate. Even as the Dongria Kondh have opposed Vedanta, their cousins who lived at the foot of the Niyamgiri agreed to move in exchange for new houses, a school, and one job per family that pays some $250 a month. "I am not saying we are philanthropists, or that we are going to save the Dongria," says Kumar, the Vedanta plant boss. "But I honestly believe that we will create opportunities here."

Up on the unspoiled hillsides, the clock seems to have stopped ticking centuries ago. During a recent harvest festival, villagers beat drums and carry out ritual slaughter of chickens and water buffalo while a holy man runs over a bed of red-hot coals. But the Dongria are deeply impoverished and often perish by their early 40s from cholera and other preventable diseases. Exhausted by their hardscrabble life and weary of protests against Vedanta, some are now ready to accept the plant and the changes it will bring. "Two years ago, my wife died because there was no road for a doctor to come up here," says Damo Majhi, a 32-year-old Dongria. Had the Vedanta project been built, he muses, she might have been saved. "If there's a road, there is a doctor, there is a school, there is food, then my daughters might not die."

Business Exchange: Read, save, and add content on BW's new Web 2.0 topic networkCutting Through Red TapeFinding land isn't the only hassle faced by companies setting up shop in India. The World Bank's Doing Business in India rates 17 cities in areas such as contracts, taxes, and registering property. Ludhiana and Hyderabad get high marks, while Kolkata and Kochi rate poorly.To view the report, go to http://bx.businessweek.com/india-business/reference/